Free and Clear Sale Power Limited

By: Thomas Scappaticci Jr.

St. John's Law Student

American Bankruptcy Institute Law Review Staff

 

The decision in Clear Channel Outdoor, Inc. v. Knupfer (In re PW)

[1]

cast doubt on the ability of a senior secured creditor to take title free and clear of junior liens under section 363(f) of the Bankruptcy Code.  In Clear Channel, the Ninth Circuit Bankruptcy Appellate Panel held that “[s]ection  363(f) of the Bankruptcy Code [does not] permit a secured creditor to credit bid its debt and purchase estate property, taking title free and clear of valid, non consenting junior liens.”

[2]

  The Court noted the split in cases interpreting the section 363(f)(3) ground for free and clear sales, but followed the more restrictive line that limits such sales to situations where the sale proceeds exceeded the face amount of all liens,

[3]

thus making it unavailable in cases where the junior liens are undersecured.  The Court’s interpretation section 363(f)(5) was more novel in nature, holding that a “cram down” is not a legal proceeding under that provision.

[4]

 The truly novel aspect of the opinion, however, was its holding that the section 363(m) statutory mootness provision applied only to the sale itself, and did not shield the section 363(f) free and clear aspect of the sale.

[5]

  This holding seems to allow a junior lien creditor to attack, post sale, virtually any sale that does not fully satisfy its claim.

In Clear Channel, DB Burbank, LLC (DB) “held a first-priority lien on substantially all of PW’s assets[,]”

[6]

amounting to more than forty million dollars.

[7]

The Trustee and DB reached an agreement in which DB would purchase the property for an amount equal to its lien “if there were no qualified overbidders.”

[8]

Clear Channel, holding a two point five million dollar junior lien,

[9]

opposed the trustee’s motion “to approve the sale free and clear of liens under § 363(f)(3) and (f)(5),”

[10]

but the bankruptcy court, nonetheless, authorized the sale free and clear of liens under section 363(f)(5).

[11]

  There were no qualified overbidders, and the bankruptcy court confirmed the sale to DB, finding the sale to be a good faith purchase.

[12]

  Clear Channel filed an appeal challenging, inter alia, the authorization of the sale free and clear of its lien and the confirmation of the sale to DB.

[13]

 

The threshold issue was whether Clear Channel’s challenge to the sale was statutorily moot under 11 U.S.C. § 363(m).

[14]

  The B.A.P. relied on the “plain-language” of section 363(m), citing to the fact that section 363(m)’s express terms state that it applies only to subsections (b) and (c) of section 363.

[15]

The B.A.P. further cited to the fact that section 363(f)(5) expressly states that it “affects the validity of a sale or lease under such authorization . . . [,]”

[16]

but does not include “lien-stripping” in the statutory language.

[17]

  The court noted that “Congress could easily have broadened the protection of § 363(b) to include lien-stripping[,]”

[18]

and concluded that the lack of the express term “lien-stripping” from the statute indicates that Congress did not intend for the protections of section 363(m) to apply to lien stripping.

[19]

 

 

The B.A.P. next addressed whether sections 363(f)(3) and (f)(5) allowed the property to be sold free and clear of Clear Channel’s lien.

[20]

  The first issue arises from the language of section 363(f)(3), which allows property to be sold free and clear of liens if the property sells for an amount “greater than the aggregate value of all liens on the property.”

[21]

Some courts interpret the term “value” as meaning the “economic value” of the liens,

[22]

while others interpret the term to refer to the “face value” of the liens.

[23]

  The B.A.P. agreed with the latter view.

[24]

In doing so, the court relied on the wording of the statute

[25]

and the congressional intent behind the 1984 amendments of 363(f),

[26]

an analysis akin to other courts that reached the same conclusion.

[27]

 

The B.A.P. then turned its discussion to section 363(f)(5),

[28]

using a three-part test in its analysis.

[29]

 The B.A.P. concluded that section 363(f)(5) contained three elements that need to be met in order for property to be sold free and clear of other interests:  “1) a proceeding exists or could be brought in which 2) the nondebtor could be compelled to accept a money satisfaction of 3) its interest.”

[30]

  The Court focused on whether the second element of its test – “compelling satisfaction for less than full payment”

[31]

– could be satisfied.

[32]

  While some courts require that, despite the express language in section 363(f)(5), a full money satisfaction would need to be compelled for property to be sold free and clear,

[33]

the B.A.P. agreed with the courts that look to see if satisfaction could be compelled by “less than the value of the claim secured by the interest.”

[34]

However, the B.A.P. did not focus on the amount of the payment as much as it did on the mechanism by which satisfaction could be compelled for an amount less than the full value of the interest,

[35]

an approach finding at least some support in case law and secondary sources.

[36]

  In doing this, the B.A.P. construed the scope of section 363(f)(5) very narrowly.

[37]

 This, according to the B.A.P., allows paragraph five to remain in harmony with the other four sections of section 363(f), as well as section 1206 of the Bankruptcy Code, without encroaching on their scope.

[38]

 

The B.A.P. concluded its analysis with a discussion of whether a proceeding existed “in which the nondebtor could be forced to accept money in satisfaction of its interest.”

[39]

  The B.A.P. analyzed this final element in the negative, specifically, discussing how a 11 U.S.C. § 1129(b)(2) “cramdown” proceeding would not qualify as a “legal proceeding” under section 363(f)(5).

[40]

  After acknowledging that other courts allow a “cramdown” proceeding to fulfill the proceeding element of section 363(f)(5),

[41]

the B.A.P. concluded to the contrary.

[42]

  The B.A.P. held that the use of section 1129(b)(2) to satisfy section 363(f)(5) would render section 363(f)(5) superfluous,

[43]

and would “undercut the required showing of a separate proceeding,”

[44]

as the “cramdown” proceeding occurs “only in the context of plan confirmation.”

[45]

 

Thus, this B.A.P. decision can have far reaching effects in the field of bankruptcy. The B.A.P.’s interpretation of section 363(f)(3) means that uncertainty will continue to surround proceedings where the sale of a property will not satisfy all the liens encumbering the property.

[46]

  Under the B.A.P.’s interpretation, it may be impossible to sell a piece of property free and clear of any liens if its value has dropped; such can lead to a drop in the final sale price of the property.

[47]

  Moreover, the B.A.P.’s “narrow” reading of section 363(f)(5), making it available in only a limited number of situations,

[48]

may all but remove section 363(f)(5) from the toolkit of those wishing to sell property free and clear of interests. The B.A.P.’s statutory mootness holding, combined with the additional difficulties selling property free and clear of any interests, will serve to augment the impact of the B.A.P.’s ruling.





[1]

391 B.R. 25 (B.A.P. 9th Cir. 2008).

[2]

Id. at 29.

[3]

See infra notes 21–27 and accompanying text (discussing B.A.P.’s § 363(f)(3) holding).

[4]

See infra notes 28–45 and accompanying text (discussing B.A.P.’s § 363(f)(5) holding).

[5]

See In re PW, 391 at 35–37 (holding that, while Clear Channel may not contest actual sale, “§ 363(m) does not apply to lien-stripping under § 363(f)”); infra notes 14–19 and accompanying text (discussing B.A.P.’s § 363(m) holding).

[6]

Id. at 31.

[7]

Id. at 29

[8]

Id. at 31

[9]

Id. at 30.

[10]

Id. at 32.

[11]

Id. at 32.

[12]

Id.

[13]

Id.

[14]

See id. at 35

[15]

See id. (“[A] plain language reading of the section would not give § 363(m) protection to an out-of-the-ordinary-course use approved by a bankruptcy court.”).

[16]

In re PW, 391 B.R. at 35; see 11 U.S.C. § 363(m) (2006)

[17]

See In re PW, 391 B.R. 35–36.  The B.A.P. also found support for its interpretation of § 363(m) with “Congress’ efforts to protect liens and security interest granted by the estate in § 364.” See id. at 36

[18]

See id.

[19]

See id. (“[I]n choosing the words it did in § 363(m), Congress did not intend [sales and lien-stripping] to received the same level of protection.”).

[20]

See id. at 37.

[21]

See In re PW, 391 B.R. at 39–40 (citing to § 363(f)(3) in discussion of split among courts as to meaning of word value in § 363(f)(3)).

[22]

See, e.g., In re WPRV-TV,143 B.R. 315, 320–21 (D.P.R. 1991) (holding that value means “actual value”); In re Beker Indus. Corp., 63 B.R. 474, 476 (S.D.N.Y. 1986) (concluding that meaning of value in § 363(f)(3) refers to economic value); In re Milford Group, Inc., 150 B.R. 904, 906 (Bankr. M.D.Pa. 1992) (“[T]he phrase ‘value of all liens’. . . mean[s] the value of the collateral.”).

[23]

See e.g., Richardson v. PittCounty (In re Stroud), 47 B.R. 999, 1001–02 (E.D.N.C. 1985) (holding that secured lien holders must be “fully compensated” for sale free and clear under § 363(f)(3)); In re Canonigo, 276 B.R. 257, 263 (Bankr. N.D.Cal. 2002) (“[T]he phrase ‘the aggregate value of the liens’ means the full face amount of the claims secured by the liens.”);   In re F. Perroncello, 170 B.R. 189, 191 (Bankr. D.Mass. 1994) (“I am persuaded that ‘value’ in the context of § 363(f)(3) can only mean face value rather than fair market value.”).

[24]

In re PW, 391 B.R. at 41 (joining the courts that find value to mean the face value of the liens).

[25]

See id. at 40 (reasoning that interpreting value in 363(f)(3) to mean economic value would be overly broad in context of paragraph).

[26]

See id. at 40 n. 16 (buttressing its interpretation with 1984 amendments to § 363(f)(3) where it found changes to paragraph made clear Congress’ intent for value to mean face value).

[27]

See, e.g., Scherer v. Federal National Mortgage Association (In re Terrace Chalet Apartments, Ltd.), 159 B.R. 821, 823 (N.D.Ill. 1993) (interpreting change in language of 363(f)(3) as manifestation of Congress’ intent for § 363(f)(3) to secure more than economic value); In re Feinstein Family P’ship, 247 B.R. 502, 508–09 (M.D.Fla. 2000) (“[C]ongress intended Section 363(f)(3) to protect the amount of the secured debt and not the economic value of the lien.”).

[28]

See In re PW, 391 B.R. at 41.

[29]

See id.

[30]

See id.

[31]

Id. at 42

[32]

See id.

[33]

See Scherer v. Fed. Nat’l Mortgage Ass’n (In re Terrace Chatlet Apartments, Ltd.), 159 B.R. 821, 829 (Bankr. N.D. Ill. 1993) (“Some courts interpret this provision as meaning that the trustee must pay the full amount of the secured party's lien, unless ‘equitable considerations’ will justify lien extinguishment upon realization of less than the full amount of the secured debt.”); G COLLIER ON BANKRUPTCY, App. Pt. 44, at 44-534 (Alan N. Resnick et al. eds., 15th ed. rev. 2006) (“According to some of these courts, the reference in subsection (f)(5) to ‘money satisfaction’ means ‘full money satisfaction,’ and thus the lienholders must be oversecured to trigger this provision, unless ‘equitable considerations’ support extinguishing an unsecured lien.”) (emphasis in original); see e.g., In re Stroud, 47 B.R. at 1003 (holding that § 363(f)(5) requires full money satisfaction in cases of liquidation, but not of rehabilitation).

[34]

See In re PW, 391 B.R. at 42 (emphasis in original); see e.g., In re Terrace Chatlet Apartments, Ltd., 159 B.R. at 829 (criticizing courts that require full satisfaction to satisfy § 363(f)(5) on its way to holding that § 363(f)(5) does not require full satisfaction).

[35]

See In re PW, 391 B.R. at 43, 45 (“We . . . hold that the bankruptcy court must make a finding of the existence of such a mechanism and the trustee must demonstrate how satisfaction of the lien ‘could be compelled.’”) (citation omitted)

[36]

See, e.g., In re Gulf States Steel, Inc. of Ala., 285 B.R. 497, 508 (Bankr. N.D. Ala. 2002) (“Section 363(f)(5) does not require that the sale price for the Property must exceed the value of the interests, but rather, only that the mechanism exists to address extinguishing the lien or interest without paying such interest in full.”); 3 Collier On Bankruptcy, ¶ 363.06[6][a], at 363-55 (Alan N. Resnick et al. eds., 15th ed. rev. 2006) (“[I]t would appear that the court may not be able to order a sale out of the ordinary course free of a security interest unless it can find some other basis for maintaining that there was sufficient money satisfaction, or one of the other grounds listed in section 363(f) is satisfied.”).

[37]

See In re PW, 391 B.R. at 43 (“Although this view leads to a relatively small role for paragraph (5), we are no effectively writing it out of the Code.”). The B.A.P. went on to justify its conclusion by conceiving several examples that would fit this narrow reading of § 363(f)(5). See id.

[38]

See In re PW, 391 B.R. at 43–45.  Section 1206 reads: “After notice and a hearing, in addition to the authorization contained in section 363(f), the trustee in a case under this chapter may sell property under section 363(b) and (c) free and clear of any interest in such property of an entity other than the estate if the property is farmland, farm equipment, or property used to carry out a commercial fishing operation (including a commercial fishing vessel), except that the proceeds of such sale shall be subject to such interest.” 11 U.S.C. § 1206 (2006).  The B.A.P. concluded that, in order to rectify what would be a conflict between § 1206 and § 363(f), section 363(f)(5) would need to be construed narrowly. See In re PW, 391 B.R. at 44–45.

[39]

See id. at 45

[40]

See In re PW, 391 B.R. at 46 (“[T]he availability of cramdown under § 1129(b)(2) is not a legal or equitable proceeding to which § 363(f)(5) is applicable.”); see also 11 U.S.C. § 1129(b)(2) (providing “cramdown” proceeding in which bankruptcy court could compel creditor to accept bankruptcy plan).

[41]

See In re PW, 391 B.R. at 46; See e.g., In re Gulf States Steel, 285 B.R. at 508 (“In this case, each of the claims, liens or interest identified in the Sale Motion could be compelled to accept a money satisfaction in a cram down plan of reorganization in a Chapter 11 case.”); In re Healthco Int’l Inc., 174 B.R. 174, 176 (Bankr. D. Mass. 1994) (“Such a ‘cramdown’ proceeding complies with the description of proceedings referred to in subparagraph (f)(5), and many courts have so held.”)

[42]

See In re PW, 391 B.R. at 46 (“[T]he availability of cramdown under § 1129(b)(2) is not a legal or equitable proceeding to which § 363(f)(5) is applicable.”).

[43]

See id. (“If the proceeding authorizing the satisfaction was found elsewhere in the Bankruptcy Code, then an estate would not need § 363(f)(5) at all, it could simply use the other Code provision.”).

[44]

See id.

[45]

See id. (“To isolate and separate the cramdown from the check and balances inherent in the plan process undermines the entire confirmation process . . . .”).

[46]

See Collier, supra note 33 at 44-530 (discussing how different interpretations of § 363(f)(3) and (f)(5) can breed uncertainty when liens exceed value of encumbered property).

[47]

See Collier, supra note 33 at 44-530–31 (discussing how second lienholder withholding consent can prevent bankruptcy sale, thus leading to lower prices in state foreclosure sale).

[48]

See In re PW, 391 B.R. at 43 (noting that “narrow reading” of paragraph five will lead to “relatively small role” for paragraph).